Rolling back the standards

You've got to hand it to retail giant Wal-Mart Stores Inc. (www.walmart.com) — the company is relentless in the way it redefines the limits of supply chain management. The retailer's ability to provide goods at consistently low prices — while making a nice profit — is very much thanks to its proficiency at managing and monitoring every transactional step.

Some are now loudly questioning Wal-Mart's latest strategy, though, indicating that the retailer pushed the envelope way too far this time.

No, I'm not talking about the retailer's somewhat draconian edicts that its top 100 suppliers start tagging pallets and cases with radio frequency identification (RFID) chips by January 2005. Nor am I referring to Wal-Mart's dictate that its partners start using the electronic data interchange EDI INT AS2 standard over the Internet within 18 months. Those technology initiatives, after all, are consistent with Wal-Mart's push to have visibility into — some would say, to have control over — every link within its supply chain.

Long lambasted by consumer advocacy groups for its use of Third World sweatshop laborers to manufacture its “All-American” apparel, Wal-Mart is now in trouble with the U.S. government for bringing illegal workers into the country. Federal officials raided 61 Wal-Mart stores in the U.S. and arrested 245 illegal workers.

Wal-Mart's immediate response was a tepid passing-of-the-buck — the workers were employed by outside contractors, said the retailer, so they weren't actually Wal-Mart employees. When it later was revealed that at least 10 of the workers were indeed employed by Wal-Mart, and that apparently some company executives knew the subcontractors were hiring illegal workers, the retailer vowed that it would review the records of all 1 million of its employees and fire any illegal workers.

It wasn't that long ago that Wal-Mart was booted off the Domini 400 Social Index — an equity benchmark measuring the social responsibility of global organizations — because of its failure to meet “adequate labor and human rights standards.” Specifically coming under fire were Wal-Mart's vendor contracting policies and practices.

According to investment firm KLD Research & Analytics Inc. (www.kld.com), which monitors the Domini index, “[Wal-Mart's] code of conduct for vendors does not stipulate that its vendors permit workers to bargain collectively, nor does it require them to pay laborers a sustainable living wage.” Equally troubling to KLD is Wal-Mart's unresponsiveness to shareholders on such issues as human rights abuses.

It doesn't stop there, though. Having reached the top of the Fortune 500, Wal-Mart now finds itself in constant litigation — class action suits alleging forced and unpaid overtime, sex discrimination and unfair labor practices will keep the retailer's attorneys busy for years. At the root of it all, though, is the suspicion that Wal-Mart's problems are of its own doing, that corporate arrogance is blind to any concern other than driving up revenues and driving down costs — at any cost.

This month Wal-Mart will be holding a meeting with its key suppliers to establish the guidelines for adopting RFID standards.

The obvious impetus behind this push is Wal-Mart's expectation that RFID technology could eventually save it billions of dollars annually. As Nigel Montgomery, an analyst with AMR Research Inc. (www.amrreasearch.com) puts it, “This is about Wal-Mart's convenience, not the suppliers'.”

Montgomery wonders if Wal-Mart's RFID edicts are part of a plan to further erode its suppliers' control over margin. Factory gate pricing, which Wal-Mart also pioneered, “stripped the suppliers of any margin that they could make in logistics execution, but at least the intrusion stopped at the gate,” he notes. “However, the RFID level of tracking could provide the transparency that Wal-Mart needs to control the margin throughout its entire chain.”

It's more than a little ironic, then, that a company insistent on micromanaging every one of its supply chain partners so that it can locate every item within its distribution centers, warehouses and stores can be so cavalier about managing its own people. Some would suggest that Wal-Mart treats its employees no differently than it treats its suppliers, and therein lies the problem.

Outsourcing is the mantra of corporate America these days. Many companies are wisely focusing on their core competencies — product design and marketing, for instance — while relying on third-party providers for warehousing and logistics tasks.

The dirty little secret of outsourcing, however, is that some companies are willing to sacrifice their ethics in the name of saving a few bucks, and if that means turning a blind eye to certain labor practices, then so be it.

In the rush to develop better, more responsive, more robust supply chains, let's make sure that we're doing it for all the right reasons. We need to somehow include “responsible” in the “better, faster, cheaper” equation.

Dave Blanchard

editor-in-chief

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